This guide covers all information you need to know about demurrage.
So, if you want to learn more about this freight term, read this guide.
- What is Demurrage?
- What are the causes of Demurrage?
- When does Import Demurrage finish?
- What is the difference between Laytime and Demurrage?
- How can Port Congestion affect your Supply Chain?
- What is the difference between Demurrage and Detention?
- What is Combined Demurrage and Detention (Merged D&D)?
- Who is responsible for Demurrage Charges?
- How much does Demurrage cost?
- How is Demurrage Calculation done?
- When does time on Demurrage end?
- What is Free Time Demurrage?
- Which factors influence Demurrage Free Time you can enjoy?
- How can you optimize your Free Time to manage Demurrage Costs?
- Is Demurrage the same as Storage?
- What is the difference between Demurrage and Wharfage?
- What is ‘time study and turnaround time’ and how does it help to control Demurrage Charges?
- Is Demurrage avoidable?
- How can you reduce or avoid Demurrage Charges?
- Which Tools can be used to Monitor and Control Demurrage and other Accessorial Charges in Shipping?
- What is the difference between Demurrage and Per Diem?
- Is Demurrage the same as Despatch?
- Can you negotiate Demurrage?
What is Demurrage?
Demurrage is the penalty charged on the shipping container for staying at the port terminal beyond the last free days.
Carriers or shipping lines grant between 3 to 7 free days to the buyers to collect, load or discharge their cargo.
Failure to collect the container within the free days attract charges per day per container till the day of pick up.
COSCO Shipping Lane
What are the causes of Demurrage?
Demurrages can arise due to causes within shipper’s control or from unforeseen circumstances. Some of the causes are:
- Lack of proper shipping time and date communication between the cargo recipient (consignee) and the shipping company. Thereby leading to consignee delaying to pick up the cargo.
- Consignee receiving incorrect customs clearance papers thus leading to clearance delays by customs authority.
- Cargo and sales order mismatch after arrival at the port hence the consignee cannot accept them.
- Failure on the shipping company to send the consignee customs clearance documents on time for cargo clearance and pick up.
- Disagreement between the consignee and the shipper.
- Container held for customs exams by customs officials.
When does Import Demurrage finish?
Import demurrage ends when the container has been removed from the destination port terminal or delivered to the client.
Carrier haulage is under the control of shipper line or their contractor hence the demurrage ends with delivery.
Merchant haulage is the customer’s transport arrangement form the terminal therefore demurrage end when the container is removed from the terminal.
Demurrage must be paid before container can be released in both cases.
What is the difference between Laytime and Demurrage?
Laytime is the period of time allowed for loading and unloading of cargo under the voyage charter. Demurrage on the other hand is the penalty levied on containers once the free days run out.
Laytime ensures the voyagers adhere to the shipping times while demurrages ensure quick turn-around and efficient use of containers.
Both laytime and demurrages offer free time or days before charges apply.
Exceeding laytime attracts demurrages which is paid to the port official where the delay occurs.
How can Port Congestion affect your Supply Chain?
Port congestion is a situation whereby ships are unable to load and unload due to full capacity at the port.
With the high adaptation of globalization, there has been an increase in demand for supply and transportation of goods globally.
This in turn has led to port congestion since cargo fleets are doubling but port expansion is still slow.
Other causes of port congestion is unstable workforce brought about by poor remunerations as well as strict customs clearance processes.
This has led to increased operational cost to the shipping lines and cargo owners in terms of demurrage, storage and detention. It has made it difficult for carriers to deliver goods on time and cargos to miss their connection ships or trucks.
Shipping companies and governments are trying to reduce port congestion in order to improve marine logistics, reduce losses and port accidents. Some of the steps taken include:
- Adopting use of technology in port operations to make clearance processes faster and smooth.
- Introduction of night shift for workers to clear as much as possible cargo within 24 hours. Improve remunerations for workers to retain them.
- Using the ‘free flow’ container delivery system for readily available truck drivers. This reduces time spent in accessing the specific container.
- Improve port infrastructure and equipment for faster movement of cargo.
- Encourage importers to adopt Shipper-Owned Containers (SOC) as opposed to Carrier-Owned Containers (COC). This saves shippers from demurrage, storage and detention charges and also eliminates the need to return containers to the port.
What is the difference between Demurrage and Detention?
Demurrage is the fine on the buyers for failing to collect their containers from the port after the last free days.
Detention is the penalty for delaying to return empty or filled containers to the port after unloading and loading cargo respectively.
Demurrages applies when the container is still within the port whereas detention applies when the container is used outside the port.
Demurrage and detention offer buyers “free times” usually between 3 to 20 days to collect containers or return to the yard.
During imports, demurrage would apply for not picking up the container within the allowed free time.
Detention fee would be charged for failing to return the empty container after discharging your goods within the free time.
When exporting cargo, demurrage fee will be applicable when you deliver the loaded container prior to the agreed dispatch date.
Besides, when you do not present proper customs documentation for your shipment, it may delayed at the port, hence demurrage.
Detention fee would be applied if you delay to return the filled container to the port for dispatch as expected.
What is Combined Demurrage and Detention (Merged D&D)?
Combined demurrage and detention also known as merged D&D is when the individual charges are billed as one.
In such scenarios, clients are offered flat free days for collecting and returning containers when importing.
If the free days is 14 days, clients are expected to clear, collect and return the empty container within 14 days.
Beyond the 14 days, merged D & D is charged per day for the number of days exceeded by the client.
Who is responsible for Demurrage Charges?
Once the shipment arrives at the terminal, the vessel owner is absolved of any costs incurred from thereon.
Cargo owners take responsibilities of demurrages, storage, detention, and any other charges that are levied.
How much does Demurrage cost?
Demurrage fee differs from carrier, ports, and the contract agreement in place. The average cost is between USD 80-200 per container per day.
This rate can significantly change upwards after certain number of days depending on the port.
For example, port A charges USD 80 per container per day for demurrages. If you delay to pick up 7 containers by 6 days, you will incur USD 3,360 as demurrage.
Demurrage must be paid before the cargo is released from the terminal, this amount will impact negatively on your shipping cost.
How is Demurrage Calculation done?
As mentioned above, demurrage rates vary with ports, shipping lines or contract agreement between the consignee and carrier.
To calculate demurrage payable to ship owner, demurrage rate is multiplied by the number of days or hours exceeding the laytime.
An example of the calculation is as below:
- Demurrage rate per day pro rata (PDPR) USD 2,000
- Total number of laytime exceeded by ship is 5 days 6 hour and 45 minutes
- Total demurrage payable=USD 2,000 X 5d 6h 45mèUSD 2,000 X 5.2396 days=USD 10,479.12
It is necessary to understand the exact time a laytime expires in a charter and when the demurrage start to run. This will assist to arrive at the number of days and hours in excess of the allowed free time.
Demurrage, like stop watch will continue running until there’s an exception that necessitate its stoppage.
General exceptions is made when the ship moves from loading or unloading bay to berth and vice versa during free laytime.
In this scenario, the time consumed in moving is not factored in the laytime.
However, if the ship moves when laytime is expired, demurrage will continue running and the ship owner will be compensated.
When does time on Demurrage end?
Demurrage time ends the same time laytime would have ended as stated in the specific charter.
For dry bulk market, that would be completion of cargo operations and when cargo hoses are disconnected in tanker market.
What is Free Time Demurrage?
Free time refers to the period which the container can stay at the terminal port without incurring charges.
Free time is granted by ship owners to allow the cargo owners to collect and return containers. The number of days is usually between 7 to 14 days for shipping lines and can be extended upon request.
Which factors influence Demurrage Free Time you can enjoy?
Before demurrage clock start rolling, customers are allocated a number of free days within which they can clear and collect their containers.
The elapse of the free days mean costs start going up for the clients till they pick up their cargo.
Free days are allocated depending on port location, shipping line and the contract agreement, equipment and infrastructure.
Free time is not granted in some warehouses or yards.
As a result, they determine the number of free days customers will get and when the demurrage will start to apply.
Import demurrage may start when the ship docks at the terminal port, during vessel unloading or when cargo dispatch is completed.
Free days may run out due to unforeseen circumstances such as port congestion thus leading to demurrages.
Proper advanced planning is therefore encouraged to mitigate such scenarios.
How can you optimize your Free Time to manage Demurrage Costs?
Shipping lines grant certain number of days to cargo owners to enable them to clear and collect containers for free.
If the cargo owner fails to collect the cargo within those days they are then penalized each day.
This cost can eventually impact your business negatively, therefore, as an importer you need to plan in advance to avoid demurrage.
You can optimize on the free time by pre-clearing your goods and having the haulage schedule ready.
This will give you enough time to pick up your cargo before the free days end.
Is Demurrage the same as Storage?
No, it is not the same.
Demurrage is penalty for failing to collect container whereas storage is fee for the space occupied for days beyond free days.
While demurrage is to encourage efficient use and quick turn-around for containers, storage is to deter congestions at the port container yards.
Both demurrage and storage fee are calculated per day for each container.
Does Demurrage apply to Less than Container Load (LCL) Shipments?
In LCL shipment, the shipping line is responsible for clearing the container on time and not the client. Therefore, demurrage do not apply to LCL clients.
However, they may be billed for storage space if they fail to collect their cargo within free days.
LCL vs FCL Shipping
What is the difference between Demurrage and Wharfage?
Demurrage is the fee charged on containers that stay in the terminal port after the free days have run out.
Wharfage is the amount charged by port authority for using the wharf terminal.
This fee is normally included in the terminal handling fees quotation as part of port duty.
While demurrage allows for free days before it starts running, wharfage is standard charge for using the wharf which always applies.
What is ‘time study and turnaround time’ and how does it help to control Demurrage Charges?
Time study is close monitoring of different elements of a process, recording and analyzing each one of them.
Turnaround time is the amount of time taken to complete a task such as the length of time between arrival and departure.
Knowing the turnaround time is important in supply chain as it can predict the possibility of demurrage and detention.
Shorter the turnaround time are better for business while longer turnaround time increase chances of demurrage and other related costs.
Is Demurrage avoidable?
Demurrage are caused by both known and unforeseen circumstances which can be beyond human control.
Instances such as poor planning and communication and incorrect documentation can be mitigated to avoid demurrage.
Causes which are beyond the cargo owner such as bad weather, port congestion, are hard to avoid and lead to demurrage.
How can you reduce or avoid Demurrage Charges?
While it is difficult to avoid demurrage charges during shipment, it is possible to reduce or avoid them by:
1) Clear and Effective Communication
Proactive communication between all parties involved is paramount when you are avoiding demurrages. The carrier, consignee, truckers, brokers and shippers should all be aware of where the shipment is at all times.
Communication starts the moment a shipping schedule is developed, this itinerary is shared across with everyone to plan accordingly.
Poor or lack of proper communication can lead to delay of container pick up which results into demurrages.
2) Use the Services of Knowledgeable Carriers or Freight Forwarders
The process of shipping freight across borders is no mean fit and requires experts to handle it. This is because it is complex, time consuming and simple mistakes can lead to costs such as demurrage, detention charges, etc.
Working with a freight forwarding expert gives you a peace of mind as they will handle everything on your behalf.
Established freight forwarding companies have infrastructures such as storage facilities in different ports where they can store your goods for free.
Additionally, they are able to negotiate with ship owners for sufficient free days and favorable demurrage and detention fees.
3) Understand Customs Clearance Processes for your Shipment
Having a clear understanding of customs processes for goods clearance will enable you to prepare the right documents on time.
You can also hire the services of a customs broker for a smooth process.
You can pre-clear your goods if the option is available, this will hasten the process of container discharge upon arrival.
Standard documentation required by the customs include:
- Bill of lading
- Commercial invoice
- Packing list
- Arrival schedule
- Others such as import license and dangerous goods certificate may be needed as and when required.
Ensure your supplier and carrier provide all the needed documentation on time to facilitate the process.
4) Prepare for Cargo Pick up in Advance
Have a clear schedule for container clearance and pick up from the port even before the ship arrives.
If using merchant haulage, have the trucks arrive at the port early and collect container within the allocated free days.
For carrier haulage, ensure they share a clear schedule for container pick up that falls within the free time.
5) Request for Quotation Breakdown for Demurrage Charges
Carriers should clearly indicate the demurrage rates per day, free days and the start and stop for demurrage and exceptions.
The transparency in quotation helps the buyers to plan well for the shipping costs.
Which Tools can be used to Monitor and Control Demurrage and other Accessorial Charges in Shipping?
Most organizations want to reduce shipping costs as much as possible, therefore tools for monitoring and controlling demurrage are welcome.
Key performance indicators (KPI) and root cause analysis (RCA) are tools that organizations leverage for demurrage monitoring and control.
While KPIs measure organization’s deliverables both in the past and current, RCA, help reveal problem cause and how to avoid them.
KPI and RCA tools can be used to compare organization’s trends, problem causing activities and how to solve them respectively.
To avoid demurrage and other related costs, an organization or supply and logistics’ department can study the trends cause them. Therefater, they will be able to control the issue by analyzing the cause and have future preventive measures in place.
What is the difference between Demurrage and Per Diem?
Demurrage is the fee payable by the buyer for failing to collect the container from the port terminal past free days.
This fee is paid to the ship owners as a compensation for delaying their vessels at the port.
The charges are incurred per day per container and vary with port location and shipping line.
Per Diem is the fine billed to the buyer for using port equipment beyond the allocated free time.
The equipment include; containers, chassis or air unit load devices for airlines.
The per diem amount is fixed and is charged per equipment.
Is Demurrage the same as Despatch?
No, it is not the same. Despatch is complete opposite of demurrage.
Demurrage is the penalty fees paid to the ship owner by charterer for delaying beyond allowed free time.
Conversely, despatch is the fee paid to the charterer by ship owner for loading and unloading in less time than allowed.
Can you negotiate Demurrage?
Demurrage varies depending on the carrier, port or contract agreement.
You can negotiate with the carrier for more free days for your cargo or longer laytime for the ship. This will buy you more time to clear and pick up your cargo or load and unload the ship.
Alternatively, once you get a quotation for demurrage at the port, you can request for a discount from the port official. Shipper with high volume goods are likely to get discount on the demurrages.
Since demurrage are unavoidable expenses for consignees, it is important to understand the local customs clearance process. This will help you prepare well in advance of your shipment arrival.
Additionally, you can ship ahead of time to buffer you from unpredictable situation such as bad weather, port backlog, etc.
Now, in case you have any other question about demurrage or any other freight term, feel free to contact us.
At BanSar, we offer perfect solution for all your freight forwarding services from China.